Frankly, Our Man is somewhat surprised by the slide over recent days having expected to hear a number of companies talk about how 2010 (or 2011!) is going to be the best year…ever! However, slide the market has, and thankfully OM’s portfolio has largely managed to resist the urge to join in.
So firstly, it’s important to note, that if the recent weakness is just a head-fake or a buy on the dips opportunity for others, then OM is comfortable with his book.
However, today the market has started to reach the technical levels that Our Man had jotted down as interesting in the…”this might not just be another opportunity for (the ubiquitous) them to buy on the dips” kinda way. While he’s relatively comfortable with the portfolio and not planning on doing anything, yet, Our Man has begun pondering the following:
- L GLD: Is it time to trim the GLD from its oversized position?
The position was oversized as OM felt that as the trade became more popular Gold would break through its March highs (turning the resistance to support) and possibly head up towards $1,200. With Gold now back around the level of those March highs, Our Man is watching carefully to see if they hold. Should gold be unable to hold it, OM will likely reluctantly part with some of his loot.
- L TLT: Is it time to roll some of the TLT position into SPY puts?
Our Man had circled the 1060, 1050 and 1020 levels on the S&P Index as his numbers to watch, after taking it as a positive sign that his simplistic technical analysis and Elliot Wave Theory seemed to settle on similar numbers for the first time. 1060 as a level at which to start pondering, 1050 as one to see whether there were any buyers on these dips and 1020 as a sign that there weren’t enough of those buyers.
Our Man’s view of market structure is pretty simplistic, as there are only 3 investors Momentum guys, Fundamental guys and Others (Who? Well our man looks at them as the wild cards…a mixture of I-need-to-keep-my-job people and retail investors).
- Momentum guys have been buyers on the way up, Fundamental guys have been holders on the way up, and Others have been neutral to net buyers on the way up.
The market has now fallen 5% from peak -- will people call it a dip and still be buyers (like every pullback in this rally)?
Or will the plethora of negative data give a pause as people wait to see what happens (hello, to OM's boss)? If it does give a pause, does that mean Fundamental guys start/continue to bail (they know they're beyond fair value, and were likely running winners) and do Others (especially those that lost a ton last year, made a good chunk this year and can see year-end redemption so close at hand) join them getting out to protect themselves? If so, given retail has shown little interest in playing this rally and there's no natural buyers -- does that cause momentum guys to want to move from L to S? Especially if the move downwards stretches from 5-8% and the peak drifts further into the past?
Thus, if the market eases through 1050, is that the time to find some puts…with the intent of adding more if it ever goes through 1020? Or should he stick with his flight to quality play? Or is there a more creative way to use his mix of TLT, GLD and SPY put assets to profit from a falling market?
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Wednesday, October 28
Sunday, October 25
Underway...
Long TLT
So Our Man in NYC (“OM”, or “Our Man” depending on my mood, laziness, etc) feels like a recalcitrant school boy writing this post, given the broad unpopularity of his position. Furthermore, Our Man understands the reasoning behind the popular Short TLT (or Long TBT) position being posited by many; that the US government deficits are unsustainable and the willingness of creditors to continue financing them (especially of a dollar that’s likely to decline in value) is not infinite.
Then why take the other side of this trade? The reasoning is simple; OM doesn’t like equities, no make that really doesn’t like equities…in that he has no idea how they can rationally price in an implied 4%+ GDP growth for 2010! Furthermore, OM suspects that now the spigots of government financing have finally started to slow (how we miss you “Cash for Clunkers”) that the probability favours some kind of macro disappointment being around the corner.
Disappointment you say? Yes, sireee…OM still thinks there’s a chance of your good ole fashioned double dip, ISM going back under 50, what Q4 GDP isn’t 3%+, oh my god! Furthermore, he suspects that such disappointment will be greeted with a “what, you mean we can’t take a big bounce recovery for granted in 2010 and price things on 2011-12 are almost here and they’ll be like 2007 numbers, with its whopping margins”, kind of reception from the equity players.
How to play such a disappointment?
- Short SPY? Keynes did say “the market can stay irrational longer than you can stay solvent”, and Keynes is all the rage these days! Besides, OM remembers his carefree youth…and even then the shortcuts he used to take home from school across the train tracks weren’t advisable!
- L SPY puts? While issues could rear their heads before the back-end of 2009, it’s more likely to come to the fore in mid-Q1 to mid-Q2 2010. Besides, negative carry trades are no really not that fun and it’s an arrow OM would like to retain in his quiver, in case things the technicals look more interesting.
And that led OM to L TLT?
Well, it’s clearly imperfect, but it’s not a long-term holding…it’s more of a flight to quality play, in the medium-term. Rightly, or wrongly, OM’s thinking is that if there’s any proper correction in the equity markets then it’s likely that the behavioural instinct of investors will kick in and they’ll run to Treasury bonds, irrespective of fears about long-term solvency. Furthermore, who knows…maybe that puny yield will mean OM can get Mrs. OM a shiny iPhone for Christmas!
Long GLD
If he had to choose a side, OM would leap (quite theatrically, of course) into the deflationist view of the world thus this may not seem like a natural holding (given the barbaric relic’s alleged inflation hedging properties). However, GLD is OM’s play on the bad Fed/governance and weak currency. In OM’s humble view the credit crisis bears some resemblance to various financial crises before, and GLD is OMs hedge in-case of the "sudden stop" (as in, the shock devaluation/currency crisis that various Asia currencies saw in 97, etc). The single biggest cause of a sudden stop is likely to be either a default by the US government or an unwillingness of creditors (primarily China and Japan) to lend to the US (in all probability, leading to the US defaulting!), hence OM hopes the GLD offers some hedge to his TLT position in case things go south.
Why GLD?
1). Gold stocks have leverage to the gold price though OM is concerned this wouldn’t be as clear this time and wouldn’t help in the case of a sudden-stop (i.e. when their costs in ZAR or AUD, etc, go up sharply in USD terms), thus the preference for the hard asset.
2). GLD holds physical gold and is the 5th or 6th largest holder of gold in the world (just ahead of the Swiss Central Bank, woo hoo!).
3). There isn't much physical Gold in the world (you could pretty much fill 1 oil tanker, or a few swimming pools, with all the gold in the world).
Positioning (as at 10/19):
PA: L GLD – 54.4%; L Long-Term Treasuries – 41.5% (because of pre-existing positions, Treasury bonds are held in slightly smaller size)
Kaching: L GLD – 46.5%, L TLT 47.7%
So Our Man in NYC (“OM”, or “Our Man” depending on my mood, laziness, etc) feels like a recalcitrant school boy writing this post, given the broad unpopularity of his position. Furthermore, Our Man understands the reasoning behind the popular Short TLT (or Long TBT) position being posited by many; that the US government deficits are unsustainable and the willingness of creditors to continue financing them (especially of a dollar that’s likely to decline in value) is not infinite.
Then why take the other side of this trade? The reasoning is simple; OM doesn’t like equities, no make that really doesn’t like equities…in that he has no idea how they can rationally price in an implied 4%+ GDP growth for 2010! Furthermore, OM suspects that now the spigots of government financing have finally started to slow (how we miss you “Cash for Clunkers”) that the probability favours some kind of macro disappointment being around the corner.
Disappointment you say? Yes, sireee…OM still thinks there’s a chance of your good ole fashioned double dip, ISM going back under 50, what Q4 GDP isn’t 3%+, oh my god! Furthermore, he suspects that such disappointment will be greeted with a “what, you mean we can’t take a big bounce recovery for granted in 2010 and price things on 2011-12 are almost here and they’ll be like 2007 numbers, with its whopping margins”, kind of reception from the equity players.
How to play such a disappointment?
- Short SPY? Keynes did say “the market can stay irrational longer than you can stay solvent”, and Keynes is all the rage these days! Besides, OM remembers his carefree youth…and even then the shortcuts he used to take home from school across the train tracks weren’t advisable!
- L SPY puts? While issues could rear their heads before the back-end of 2009, it’s more likely to come to the fore in mid-Q1 to mid-Q2 2010. Besides, negative carry trades are no really not that fun and it’s an arrow OM would like to retain in his quiver, in case things the technicals look more interesting.
And that led OM to L TLT?
Well, it’s clearly imperfect, but it’s not a long-term holding…it’s more of a flight to quality play, in the medium-term. Rightly, or wrongly, OM’s thinking is that if there’s any proper correction in the equity markets then it’s likely that the behavioural instinct of investors will kick in and they’ll run to Treasury bonds, irrespective of fears about long-term solvency. Furthermore, who knows…maybe that puny yield will mean OM can get Mrs. OM a shiny iPhone for Christmas!
Long GLD
If he had to choose a side, OM would leap (quite theatrically, of course) into the deflationist view of the world thus this may not seem like a natural holding (given the barbaric relic’s alleged inflation hedging properties). However, GLD is OM’s play on the bad Fed/governance and weak currency. In OM’s humble view the credit crisis bears some resemblance to various financial crises before, and GLD is OMs hedge in-case of the "sudden stop" (as in, the shock devaluation/currency crisis that various Asia currencies saw in 97, etc). The single biggest cause of a sudden stop is likely to be either a default by the US government or an unwillingness of creditors (primarily China and Japan) to lend to the US (in all probability, leading to the US defaulting!), hence OM hopes the GLD offers some hedge to his TLT position in case things go south.
Why GLD?
1). Gold stocks have leverage to the gold price though OM is concerned this wouldn’t be as clear this time and wouldn’t help in the case of a sudden-stop (i.e. when their costs in ZAR or AUD, etc, go up sharply in USD terms), thus the preference for the hard asset.
2). GLD holds physical gold and is the 5th or 6th largest holder of gold in the world (just ahead of the Swiss Central Bank, woo hoo!).
3). There isn't much physical Gold in the world (you could pretty much fill 1 oil tanker, or a few swimming pools, with all the gold in the world).
Positioning (as at 10/19):
PA: L GLD – 54.4%; L Long-Term Treasuries – 41.5% (because of pre-existing positions, Treasury bonds are held in slightly smaller size)
Kaching: L GLD – 46.5%, L TLT 47.7%
Saturday, October 24
And so our journey begins
So what, you may be wondering, is the point of this blog. Well, it’s a way of enforcing discipline to put investment thoughts down on paper and providing a journal for tracking them as time goes by. Over time, it’ll hopefully improve one’s ability to invest! While keeping a private journal/diary would probably be a better way, it’s harder to skip out on writing a blog post…and it’s always more fun to take a journey with friends!
Ideas are tracked in 2 ways, through PA investments and online on Kaching.com. The constraints involved in both, limit our intrepid hero (aka Our Man in NYC, or “OM”) to medium-long term ideas (3-6 months to multi-year) in addition to constraining the universe available. Nonetheless, it would be foolhardy to suggest any likely negative impact from these constraints.
Differences between PA and Kaching:
- Different start dates (9/8 for PA and 10/19 for Kaching. The PA's performance in the intervening period was +2.64%)
- Slightly different initial position sizes (due to existing positions in the PA)
- PA requiring approval on trades from the powers that be, meaning it’s almost exclusively invested in ETFs, and options thereupon, with the occasional small/micro cap.
- Kaching being limited solely to ETFs and equities, and allowing no options (and the implied leverage they provide).
PS. What’s with this 3rd person stuff?
I enjoy the literary device of using it, so bleah!
Ideas are tracked in 2 ways, through PA investments and online on Kaching.com. The constraints involved in both, limit our intrepid hero (aka Our Man in NYC, or “OM”) to medium-long term ideas (3-6 months to multi-year) in addition to constraining the universe available. Nonetheless, it would be foolhardy to suggest any likely negative impact from these constraints.
Differences between PA and Kaching:
- Different start dates (9/8 for PA and 10/19 for Kaching. The PA's performance in the intervening period was +2.64%)
- Slightly different initial position sizes (due to existing positions in the PA)
- PA requiring approval on trades from the powers that be, meaning it’s almost exclusively invested in ETFs, and options thereupon, with the occasional small/micro cap.
- Kaching being limited solely to ETFs and equities, and allowing no options (and the implied leverage they provide).
PS. What’s with this 3rd person stuff?
I enjoy the literary device of using it, so bleah!